Of all the taxes in the UK, most of all newly incorporated business are interested in finding out more information regarding VAT (or Value Added Tax).
When you operate a business, it is important to understand the rules, requirements, possible advantages and disadvantages of becoming a VAT registered business.
Should I register for VAT?
VAT Registration is compulsory if your business generates a taxable turnover of £85,000 (2017/18 rates) or more. Nevertheless, firms that do not reach this turnover may choose to register voluntarily as this can provide a number of advantages.
The standard rate of VAT in the UK stands at 20%. There are however in fact 3 other rates of VAT which are:
Reduced Rate – 5%
Zero Rate – 0%
Exempt – N/A
What are the advantages of being VAT Registered?
Being a VAT registered business can be beneficial to you. We look at a few of these here:
The first advantage of being VAT Registered is that small businesses can give the appearance of being bigger and more established. This is because once you have a VAT number, nobody will be able to easily tell if your business’ turnover exceeds the VAT registration threshold. This can give small businesses a certain appeal in the eyes of other businesses and could lead to you winning more business.
Another main advantage of VAT Registration is that it allows you to reclaim VAT on most goods and services purchased from other businesses.
Example:
If your VAT registered business makes a sale of £100,000 pounds it may have to include an additional £20,000 of VAT (this is of course subject to your applicable rate of VAT and whether the supply is VAT’able). At the same time, let’s say your business purchased £80,000 from suppliers who charged your business £16,000 of VAT. This could result in your business being liable to pay a total of £4,000 of VAT when you submit your quarterly VAT returns.
Lastly, being VAT Registered can facilitate business to business relationship for small businesses as many international companies are often reluctant to trade with businesses who are not VAT Registered.
Obviously while VAT Registration has its advantages it also has its disadvantages
What are the disadvantages of being VAT Registered?
The principal limitation of being VAT registered is that it forces your business to include VAT on all your sales. Consequently, your products and services will appear more expensive to customers and for those business who are not VAT registered, this increase may be unwelcomed. It is therefore particularly an issue for business who sell mainly or wholly direct to consumers.
The second main limitation is that VAT Registration requires you to submit quarterly VAT Returns. Extra paperwork and administration is thus unavoidable as your business will need to maintain and keep VAT invoices and receipts. Often this means extra costs with your accountant.
VAT Registration has both its advantages and disadvantages. Undoubtedly, deciding whether registering your company is worth it can be a difficult decision.
VAT Registration enquiries
If you would like more information or require assistance with you VAT Registration, then please do not hesitate to contact one of our tax specialists at 020 8429 9245 or email us at info@wisteria.co.uk.